To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in First Mining Gold’s (TSE:FF) returns on capital, so let’s have a look.
What is Return On Capital Employed (ROCE)?
If you haven’t worked with ROCE before, it measures the ‘return’ (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for First Mining Gold:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.034 = CA$8.6m ÷ (CA$261m – CA$7.4m) (Based on the trailing twelve months to September 2021).
Thus, First Mining Gold has an ROCE of 3.4%. In absolute terms, that’s a low return but it’s around the Metals and Mining industry average of 4.2%.
Above you can see how the current ROCE for First Mining Gold compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like, you can check out the forecasts from the analysts covering First Mining Gold here for free.
What Does the ROCE Trend For First Mining Gold Tell Us?
We’re delighted to see that First Mining Gold is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it’s now turned things around and is earning 3.4% on its capital. While returns have increased, the amount of capital employed by First Mining Gold has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it’d be helpful to know if the company does have any investment plans going forward. So if you’re looking for high growth, you’ll want to see a business’s capital employed also increasing.
In summary, we’re delighted to see that First Mining Gold has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Given the stock has declined 58% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
One more thing, we’ve spotted 2 warning signs facing First Mining Gold that you might find interesting.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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